What All of 2019's Bad Retail News Means for 2020

Chances are, the store closures and bankruptcies will continue, especially if there's a recession.
Barneys New York

Barneys New York

I think most of us are done with the term "retail apocalypse" — right? — but there's no denying that 2019 brought about something of a reckoning for many fashion and retail businesses. As you've probably noticed if you read this website, there was simply a lot of bad retail news this year: There have been more store closuresover 9,000 so far — than any full year prior. In apparel specifically, Forever 21, Payless, Charlotte Russe, Diesel USA and Barneys all filed for bankruptcy, with the latter now tragically in liquidation; Zac Posen suddenly shuttered his brand; and Old Navy and Madewell are being spun off from their parent companies' struggling anchor brands (Gap and J.Crew, respectively). Yes, all of these retailers, and many others, struggled in years prior, but 2019 felt like the year their problems came to a head, in which they weren't able to just refinance or discount their way through another quarter.

And chances are, another crop of retailers are ending the year hanging on by a thread, hoping the current holiday shopping season will bring them good tidings in the form of money that will keep them from meeting a similar fate in 2020.

The root of all this upheaval is not as simple as a shift to online shopping, bad economic times (the economy has actually been pretty strong...for now) or those monstrously wasteful and/or remarkably eco-conscious Gen-Z consumers. The main culprits are competition, failure to evolve and debt.

"The way I put it to retailers is like this: Go stand on a street corner in any major global city. What you'll see around you in every direction is retail that was designed to succeed in the 20th century. That also means that the majority is designed to fail in the 21st century," says retail consultant Doug Stephens. According to Stephens, we're not in the midst of a retail apocalypse, but rather an "historic transition" during which only retailers offering the most convenience and/or the best customer experience will ultimately survive. With the growth of giants like Amazon and WalMart and the proliferation of digitally savvy, innovative retailers and direct-to-consumer brands, competition has never been higher.

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Companies that were set up in a past retail climate — even at the beginning of this concluding decade — may not be equipped for the competition and shopping habits that exist today, and evolving to keep up with those changes can cost time and money that those companies simply may not have. Add debt to that equation and there's likely very little flexibility to improve.

"This competitive environment is becoming more and more acute for the less flexible folks; the overlay on top of all of that is the level of debt these companies have taken on," explains Charlie O'Shea, a vice president and senior credit officer at Moody's. "Even in a historically low-[interest] rate environment, they can't function. There is no way for them to make the investments necessary to even maintain, much less improve."

O'Shea also notes that the way a lot of companies — particularly public ones — are set up prevents them from seeing the bigger picture and making more fundamental, long-term changes. Instead, they focus on what will make shareholders happy for another quarter. "If you're trying to manage a company for quarterly results, you're not going to survive many quarters," he says.

It's also important to remember that 2019 wasn't actually a bad year for retail overall; rather, it was one in which underperforming retailers did worse and strong retailers did better. "In 17 years, the gulf has never been wider between the haves and have nots than right now," says O'Shea. And as we look to 2020, many say that the disparity between strong and weak businesses will only become more pronounced. "The big guys, we won't see them slowing down at all, they're going to put feet on the gas and drive faster and faster and the smaller retailers, those at the lower end of the credit scale, there's no way for them to keep up."

This will be especially true if we end up in a recession, which some experts, including over 50% of U.S. CFOS, are predicting will happen before the 2020 election. Though, failing retailers won't exactly be to blame. "I would say the problems in retail are retail-focused; the consumer is still strong," says O'Shea. "I do not make a connection between certain retailers not surviving in this environment [and the macro economy]. If you can't make it now with the strength of the consumer, maybe you ought to find something else to do."

That said, some believe in the possibility of a "self-fulfilling recession," wherein companies worried about a potential recession scale back or cut spending, which in turn can slow the economy. "If we are teetering on the edge of recession and companies are already worried, it's going to make it more likely we tip into a recession," John Graham, a finance professor at Duke University's Fuqua School of Business, told CNN Business recently. 

Regardless of the impetus, if there is an economic downturn, that could mean an even bigger reckoning for retailers that aren't doing well. "If anything were to happen to reduce consumer confidence or anything else that would put a damper on momentum that consumers had, that's going to be another straw on the camel's back for retailers already in trouble," says O'Shea.

"It will in all likelihood bring a very long period of extremely tepid growth," says Stephens of the possibility of recession. "This sets up a situation where a retailer has one of two choices to grow market share: Sell something that no one else sells or sell it in a way that no-one else sells it. In other words they’ll have create or do things that consumers actually give a shit about. And that's a lot harder to do than it sounds." Indeed, creating or doing things consumers "actually give a shit about" may sound obvious, but it's not difficult to think of a dozen retailers who just...aren't.

Recession or not, things are already looking especially grim for long-struggling apparel retailers and department stores in 2020. J.Crew, Neiman Marcus and J.C. Penney are among the retailers likely to declare bankruptcy in the next year according to Retail Dive's analysis of credit risk data.

Ultimately, it's going to take pretty radical change for any of these traditional retailers to survive. "Suffice it to say, any retailer who still believes that customer acquisition is still primarily a function of paid advertising, that their products cannot be effectively sold online or that their physical stores are only a means of distribution of product, will be out of business within the next decade," says Stephens. Plus, after a year like this one, investors could be come more cautious, which could harm anyone in the retail biz. "Venture capital in general will be harder to come by in 2020 as investors seek the shelter of more conventional and established business models and investments," he notes.

Retailers will have to worker harder than ever to essentially prove to vendors and investors (and, honestly, to themselves) that they should continue to exist. "You have to know: Why am I here? Why are people coming to my store and how loyal are they? What'll happen if I'm gone; will anyone miss me?" says O'Shea. Basically, says O'Shea, "For a lot of retailers, 2020 will be very similar to 2019."

Of course, it won't all be bad. What about the retailers who will do well in 2020? "Retailers that understand that the purchase funnel has reversed, that the store and the product are often only the beginning of the journey and that the consumer is now the most authentic, effective and measurable media channel to drive awareness, will not only survive, chances are they'll thrive," says Stephens.

The proliferation of new store formats will likely continue. The "next major wave," he says, will be "physical marketplaces that offer retail as a service to brands," like Re:Store, Showfields and Neighborhood Goods. He also predicts we'll see even more brands take active roles in social, environmental and political discussions, which is no surprise given the recent success of many purpose-driven companies. But next year, expect brands to take it to another level. "In fact," he says, "brands will, on most issues prove more effective at instigating and affecting positive social change than governments or religion."

In short, the brands are either going to die or save us all. Happy New Year!
